A Geography and Ethnic Diversity

Mozambique, with a population of around 30 million (INE 2019), covers a total land area of more than 799,380 km² (FAO 2016). It is located on the East Coast of Southern Africa and borders six other countries: Tanzania in the north; Malawi, Zimbabwe, Zambia, and Swaziland to the west; and South Africa to the south (see Figure 2.1).

Figure 2.1

Mozambique in Southern Africa

Source: Authors’ construction based on Natural Earth Data (available at: www.naturalearthdata.com/about/terms-of-use/).

Mozambique’s total border length is around 4,445 km and its approximately 2,515 km of generally sandy coastline to the east faces the Indian Ocean and includes a number of islands (FAO 2016). Some twenty-five main rivers flowing east towards the Indian Ocean cross Mozambique. The largest and historically most important river is the Zambezi, whose 820 km Mozambican section is navigable for 460 km. The road infrastructure illustrates the lack of integration in the north–south dimension (see Figure 2.2), a characteristic to which we return in what follows.

Figure 2.2

Road infrastructure and rivers

Source: Authors’ construction using © OpenStreetMap contributors (available at: www.openstreetmap.org/, www.opendatacommons.org/) for roads and the Regional Centre for Mapping of Resources for Development (RCMRD) (available at: https://opendata.rcmrd.org/) for waterways.

The country is made up of eleven provinces, and the major urban centres are generally situated along the coast, the most important being Maputo, the capital, in the far south. Other cities include Beira, in the middle of the country, Quelimane, north of Beira, Nampula, yet further north, and Cabo Delgado in the north-east corner (see Figure 2.3).

Figure 2.3

Administrative map of Mozambique

Source: Authors’ construction based on Natural Earth Data (available at www.naturalearthdata.com/about/terms-of-use/).

Before the arrival of Vasco da Gama in 1498, Bantu-speaking tribes had occupied the territory of modern Mozambique since the first centuries CE. The Arabs started influencing from approximately 1100 CE and, while the effects of the encounter between the local population and Arab traders differed between the existing tribes, the resulting ethnic diversity and Arab influence remain present to this day. Many of the conflicts and contradictions between the different parts of Mozambique that exist today also have deep historical roots – a point to which we will return in what follows.

The major ethnic groups (and subgroups)Footnote ² in Mozambique, some of which are linked to ethnic groups in neighbouring countries, are: Yao, Nyanja, Makonde, Mwani, and Makua-Lomwe in the north and centre; Nsenga, Pimbwe, Chuwabo, Nyungwe, Maravi, Sena, and Shona-Ndau in the centre; and Chopi, Bitonga, Tswa, Shangana, and Ronga in the south. To these must be added Portuguese descendants and a ‘mestiço’ minority of African/Portuguese descent. Finally, there is a community of Indian Asian origin from Pakistan, India, and various Arab countries.

Importantly, these geographic characteristics imply that economic transaction costs are exceedingly large, and regional and ethnic divides have resulted in both economic fragmentation and differences in access to political power (for details, see Grobbelaar and Lala Reference Grobbelaar and Lala2003). In broad terms, economic as well as political power concentrated in the south even before independence, and did so because of the South African economy. The capital was moved from Ilha de Moçambique to Lourenço Marques (renamed Maputo after independence) in the early 1900s, following the discovery of gold in South Africa. The significance of the move of the capital to the extreme south of a very large country because of the important economic links with a much larger neighbouring economy cannot be overemphasised.

B Colonial Legacy

Historically, Mozambique was particularly attractive for the trade of gold, ivory, and slaves, as well as other metals and hides, and, even though their occupation was limited at first, the Portuguese gradually established commercial influence from 1505, adopting protectionist measures as well as clientelist and corrupt practices. The Portuguese importance grew in the following centuries as the colonial system was progressively developed,Footnote ³ and it intensified in the mid-1880s, backed by investments by foreign capital and companies, especially British, Rhodesian, and South African.

The Portuguese colonial presence and the control of private – often foreign, Anglophone – companies over Mozambique’s basic infrastructure had tremendous consequences. Portuguese settlers effectively colonised Mozambique,Footnote ⁴ and its administrative and bureaucratic institutions, as well as the army, depended on instructions from Lisbon. Existing infrastructure ran east–west and the country remained not only ethnically but also economically disintegrated in the north–south dimension. Moreover, there was a weak and biased colonial education system, resulting in virtually no training of indigenous people or recruitment of African-Portuguese, though with some prominent exceptions.

Until around the mid-1950s, Mozambique was largely limited to supplying cheap raw materials to Portugal and cheap labour and transport services to neighbouring countries. The traditional rural sector received no government support and remained underdeveloped. Additionally, a series of legal measures aggravated the economic and social differences that divided the population. In the 1960s, there was increasing migration of settlers to Mozambique, expanding the economy and the internal market. By 1964, industrial production for the internal market exceeded production for export (Leite Reference Leite1989). But despite the fact that the economy had started to become less orientated towards continental Portugal, the struggle for independence began in that same year.

Serious challenges mounted (see Section C) and outright chaos broke out at the time of independence in 1975, when a majority of the Portuguese population left the country. Within weeks, administrative structures had collapsed and become empty shells,Footnote ⁵ and the Mozambique Liberation Front (FRELIMO), which, although a well organised liberation movement, had no experience of running a country, took over.Footnote ⁶ Its focus was on dismantling colonial institutions.

C Independence, Geopolitics, and War

The decade before independence was marked by military struggle. Although FRELIMO had been formed in 1962 as a constitutionalist and non-violent movement, it launched a military offensive in 1964 and continued to do so into the 1970s, initially taking control of parts of the north and progressively advancing towards the centre of the country. Largely due to the overthrow of the Portuguese government in April 1974, official talks about Mozambican independence started, and they led in September of the same year to the signing of the Lusaka Agreement, which established a transition government with a majority of FRELIMO members. Formal independence and the foundation of The People’s Republic of Mozambique as a one-party socialist state happened on 25 June 1975 under the leadership of FrelimoFootnote ⁷ and President Samora Machel (see Figure A2.1 for a timeline of the main events since independence).

As was the case in Vietnam in the mid-1970s after its defeat of US forces, the atmosphere in Mozambique was ‘upbeať among the Frelimo ‘comrades’. Having ‘defeated’ the Portuguese colonial power, Frelimo ambitiously declared, in jubilant tones, that the coming decade would see victory over under-development. While it was over-optimistic and, in retrospect, naive to compare victories achieved on the battlefield with challenges faced in the development field, it is pertinent to recall that the course of action taken appeared at the time self-evident to many, including the leadership in both Vietnam and Mozambique, with both economies being poor, exploited, and destroyed.Footnote ⁸

During the immediate post-independence period, national reconstruction and consolidation were in focus. However, a series of factors undermined these efforts. The first was the serious economic challenges that marked this period. As alluded to above, approximately 80 per cent of the Portuguese population had left the country. This created extreme labour shortages in public administration and the secondary and tertiary sectors, as well as having a devastating effect on agriculture, which depended on settlers for input supplies and the marketing of output, including extensive credit provision, often in kind. Consequently, living and educational/managerial standards were dismal to begin with in the newly independent country.

Second, after its transformation into a Marxist-Leninist party in 1977, Frelimo initiated a ten-year plan (1981–90) with the goal of overcoming under-development. Socialist policies were indeed the norm at the time in newly independent African countries and a logical reaction to the past. However, the strategy, conceived in orthodox central planning terms, was out of touch with the reality on the ground. Import substitution, forced mechanisation of agriculture, and resettlement of large numbers of people were at the core of the strategy. Similarly, only scant attention was paid to small farmer needs and their requirements in terms of input supplies and output outlets. Accordingly, misconceived policies were introduced, including a hostile view of the private sector. This bias had long-lasting effects, and rather than winning support among the peasantry, Frelimo was losing it.Footnote ⁹ There was room for voice and participation but only inside the party structures. At the same time, Frelimo developed authoritarian and coercive methods, in large measure in response to the context of a brutal war instigated by outsiders.

Third, independence came suddenly as well as late to Mozambique as compared with other African countries, and regional (Rhodesia and South Africa) and global (Cold War) conflicts left the new country with very little room for manoeuvre, either politically or economically. This turned out to be very costly indeed, illustrated by the heavy economic and military impact of Mozambique’s decision to enforce United Nations sanctions against Rhodesia in 1976 (UN 1976).

Mozambique’s independence posed threats to Rhodesia and South Africa, which feared a communist onslaught. They therefore supported and financed Renamo (the Mozambican National Resistance, originally designated MNR), which opposed Frelimo’s socialist orientation.Footnote ¹⁰ Renamo gathered Frelimo dissidents under the leadership of André Matsangaíssa (1977–79) and Afonso Dhlakama (1979–2018). The Renamo leadership came from the centre of Mozambique, but the movement was also constituted by members from elsewhere in the country. Frelimo has over the years pursued a policy of having representatives from all relevant ethnic groups in high positions in the party and in the government, yet prominent representatives from the centre and the north have felt ostracised.

After the independence of Zimbabwe (former Rhodesia) in 1980, the apartheid regime continued skilfully to exploit both historical and current ethnic contradictions and grievances and turned Renamo into a significant military force capable of disrupting and sabotaging large parts of the country. The Mozambican government responded by increasing repression and by targeting the supply lines of Renamo with a stronger and more sophisticated military presence and firepower. This strategy failed and the war escalated, in the midst of the regional and global Cold War. With the signing of the Nkomati Accord of non-aggression between Mozambique and South Africa in 1984, President Samora Machel hoped for some reprieve, but large-scale sabotage and destruction of infrastructure and killings continued, with support from South Africa.Footnote ¹¹ Backed by the military might of South Africa, Renamo’s ruthless warfare slowly but surely undermined Frelimo’s nation-building efforts. A stubborn but ineffective strategy by Frelimo to criminalise insurgents and Renamo supporters, not recognising the need for political settlements, added to the complexity of the situation.

Fourth, another consequence of the late timing of Mozambique’s independence was that the country had no more than a five-year ‘settling-in’ period before laissez-faire ideological winds of change swept across the world around 1980, including the election of President Ronald Reagan in the US and Margaret Thatcher as Prime Minister in the UK. These changes influenced the policy stance of international financial institutions, including in particular the International Monetary Fund (IMF) and the World Bank, and this turned out to be critical in the mid-1980s in Mozambique (see Tarp Reference Tarp1993).

D The Bretton Woods Institutions and a U-turn in Economic Strategy

The fragility of former alliances in Eastern Europe and elsewhere in the global arena (including those between the USSR, East Germany, Cuba, and China), the ongoing war, and an economic state of affairs that reached a historical low point in 1986 forced Frelimo to change course. Mozambique had no viable option but to turn increasingly to Western donors (with the Nordics having been present from very early on) for external finance, and the donors came to play a decisive role, imposing free-market policy conditionality on a war-torn economy. The Nkomati agreement, signed by President Samora Machel and the Prime Minister of South Africa, P. W. Botha, signalled the beginning of negotiations for support from the Bretton Woods institutions and the Paris Club creditors,Footnote ¹² though concrete policy initiatives only materialised after Samora Machel’s death in a plane crash in South Africa in 1986. The government launched the five-year Economic Rehabilitation Programme (PRE) in 1987 and in effect turned the economic strategy pursued so far on its head.Footnote ¹³ The implications were wide ranging.

First, the structural adjustment programme (reflecting a standard package of orthodox policy reforms that took no account of local circumstances) was ill conceived for a country at war, as had been the ten-year development plan, and the short-, medium-, and longer-term economic effects were dire. No supply response from agriculture was possible due to the overwhelming effects of the war; and subsidised industries in the cities had to lay off workers, adjust wages, and eventually expect privatisation or closure.

Second, a key element of the PRE was the privatisation of state-owned enterprises. Diogo (Reference Diogo2013: 18) notes: ‘To make the transition from a centrally planned economy to a market economy, Mozambique privatized more than 4,000 companies, about 80 pct. of them benefitting Mozambicans and on highly advantageous conditions.’ This was done presumably over a few years and without a transparent and well-functioning financial market. Moreover, in the longer term, the PRE introduced a deep-seated structural and highly problematic economic imbalance between Frelimo and Renamo as privatisation went ahead while Renamo guerrillas were still in the bush. The drive to avoid foreign takeovers ran as a red thread through the process, instituted through a national ownership requirement. There was, however, no indigenous entrepreneurial class, given the weakness in the domestic politico-judicial system and the private sector. So assets and power transferred instead to a group of individuals in the public service and to Frelimo party officials, who managed to secure favourable bank loans (see Diogo Reference Diogo2013).Footnote ¹⁴

Sumich and Honwana (Reference Sumich and Honwana2007: 19) add:

Thus, as a consequence of policy conditionalities, a ‘new’ political and business elite (which overlapped in very large measure with the ‘old’ elite) started emerging that commanded not only political power, as in the early days after independence, but also economic power – and this often without the necessary management training and capacity. Importantly, Renamo associates were in no position to benefit, as they were still in the bush when assets and opportunities were privatised.

E Peace and Multiparty Elections

Peace returned with the Rome General Peace Accords in 1992, made possible by the political transition from apartheid in South Africa. In 1994, the first multiparty elections led to the election of President Joaquim Chissano, leader of Frelimo, as President of the Republic of Mozambique. There were signs of economic recovery after peace re-established itself, with impressive growth rates, a significant decline in poverty, and the creation of new infrastructure, particularly in the social sectors, supported by the donor community.

Aid flows surged and Mozambique became widely perceived as a donor darling. However, the external assistance often came with explicit and implicit conditionalities, such as a heavy reliance on external consultants rather than promoting capacity building of nationals. Moreover, the impressive growth, in large measure due to returning refugees, did not lead to a fundamental transformation of economic structures (see Section III). Finally, while some Renamo commanders and soldiers were integrated into the new Mozambican army, no full disarmament took place. Integration into the police force was especially difficult, and the Renamo leader, Afonso Dhlakama, maintained a strong personal protection force.

On the political front, Sumich and Honwana (Reference Sumich and Honwana2007: 18) stress that

The polarisation between Frelimo and Renamo continued, and while the ideological differences weakened, regional and ethnic contradictions came more into focus.

F Dominance of Frelimo

Frelimo maintained political power in the country after the closely contested general election in 1999. Joaquim Chissano continued as president, and in the Assembly of the Republic, Frelimo held 133 and Renamo 117 seats. Shortly afterwards, Frelimo made an important strategic move ‘when the government after six years of debate, in an effort to broaden its social base and weaken Renamo, issued a decree creating “community leaders”, which meant that former “régulos” [traditional chiefs] could hold office at the local level’ (Sumich and Honwana Reference Sumich and Honwana2007: 17). Accordingly, the Frelimo government actively sought ways to engage with and remunerate the traditional chiefs by attributing formal duties to them. The system was quite transparent and deliberately visible as chiefs also got uniforms for official occasions and visits. Such relations with traditional authority count a lot in an election, when many voters seek guidance from their local chiefs. While this was a remarkable move considering Frelimo’s history as a socialism-inspired liberation movement, it helped Frelimo remain the dominant political power in the subsequent elections.

In 2002, Frelimo elected Armando Guebuza as its Secretary General and presidential candidate. Guebuza moved quickly to strengthen the party structures in all spheres of the public administration and created cells at all levels. He also deliberately chose a government of politicians over technocrats and soon commanded a structure not much different from the one in place under the one-party state. He won a comfortable victory in 2004 and became President in 2005, backed by an overwhelmingly superior financial and organisational machinery amid widespread abstention.

In 2009, a new political party started competing in the parliamentary and presidential elections. The Democratic Movement of Mozambique (MDM) started up as a splinter group of Renamo, led by the mayor in Beira, Daviz Simango, son of one of FRELIMO’s first vice-presidents during the liberation war. The Simango family, from the centre of Mozambique, had joined Renamo expecting to create a strong political opposition to Frelimo. But Renamo, dominated by Afonso Dhlakama, was not a democratic party. Young and capable members therefore broke away, aiming to pursue democratic political process. Unlike earlier splinter groups, MDM enjoyed widespread popular support, and expectations were that it would win a significant part of the votes, ending the bipolar impasse in Mozambican politics.

However, in what many observers see as a concerted effort to sabotage MDM by Frelimo and Renamo party members of the electoral commission, MDM’s lists of candidates were rejected in 7 of the 11 provinces (including Maputo city), leaving the party with no possibility of winning any significant part of the votes. Among the reasons given were missing details in the candidates’ dossiers; the whole provincial list was dropped if just one of the candidates, even if it was a substitute candidate, failed to submit all the necessary documents, such as an original birth certificate. Some candidates’ dossiers were even ‘losť in the election commission’s offices. Donors protested to President Guebuza before the election but to no avail. Nevertheless, Renamo suffered significantly from MDM’s appearance on the political scene and was reduced to only 49 seats in Parliament, while Frelimo was taken by surprise when it lost important areas in Maputo to the new party.

While traditional party politics seemed locked in a Frelimo hegemony, 2008 and 2010 witnessed a surge of demonstrations and popular uprisings in the largest cities. Discontent was ignited by the worsening living conditions among the lower middle class (due, for example, to rising food prices – see Pinstrup-Andersen Reference Pinstrup-Andersen2014). Moreover, on both occasions Frelimo and the government underestimated the strength of the reaction. The events, especially in Maputo, had tragic consequences, with police shooting resulting in civilian deaths, including children, and gave rise to a debate within Frelimo about leadership and inclusion. Eventually, President Guebuza controlled the situation partly by force and partly by giving concessions, delaying increases in the price of water, electricity, and public transport (fuel).

The Guebuza regime ended in violent confrontation with Renamo,Footnote ¹⁵ which no longer believed that the government was willing to give in to its demands, including increased decentralisation. A last-minute peace deal paved the way for an election in 2014, but even within Frelimo, the issue of succession created problems. Guebuza held on to power as long as he could, and although the Frelimo candidate Filipe Nyusi won the election, he faced massive challenges from his first day in office, as discussed below.

G Recent Events

The first of Nyusi’s challenges was that the settlement with Renamo was short-lived. Renamo argued that all the problems it had pointed to remained, and the hardliners in Frelimo, who had gained strength under Guebuza’s ten-year rule, argued that it was better to solve the Renamo challenge militarily and decisively. So violent conflict escalated and soon central parts of the country were at war. Broken power lines, sabotaged railway lines, and army convoys protecting vehicles on the main roads were once again the order of the day in Mozambique in 2016.

The Nyusi government then chose to negotiate with Renamo and give in to some of its main demands. These included decentralisation and the election of provincial governors. This move was sustained even after the death of Renamo’s leader, Afonso Dhlakama, in May 2018, which led to a considerable weakening of the party under its new leader, Ossufo Momade. A 14-page constitutional amendment was approved by which elected bodies were created at provincial, district, and municipality levels.

A second challenge was the so-called ‘hidden debť scandal, which had become symptomatic of the increase in corruption Mozambique had experienced over the last couple of decades. While they recognise that the figure is open to contestation, Williams and Isaksen (Reference Williams and Isaksen2016) note in their introduction: ‘The average annual cost of corruption to Mozambique was recently estimated to be up to US$4.9 billion for the period 2004–2014.’ The authors, who provide a detailed account (on which the following is based),Footnote ¹⁶ point out that in the final years of Guebuza’s second term, three semi-public entities took out over US$2 billion in loans from private foreign banks without submitting them to the Assembly for approval, as required by the Mozambican constitution, even though they greatly exceeded the limit placed on government borrowing by the relevant annual budget appropriation bill. Williams and Isaksen (Reference Williams and Isaksen2016) pointedly note:

The sources of the loans included Credit Suisse and the VTB Bank, and it is clear that Ematum, Proindicus, and MAM (Mozambique Asset Management) were owned and controlled by a very small group of individuals and that they were very closely linked to the security sector. When the existence of the loans became public, the IMF suspended its support to Mozambique, and much foreign aid, including all direct support to the state budget (already on a downward trajectory), was frozen or significantly reduced. This drastically restricted the fiscal space of the government and led to an economic crisis that lasted throughout the first term of President Nyusi, and which continues to impact.Footnote ¹⁷ The subsequent legal process led in 2019 to the US indictment of former Minister of Finance Manuel Chang and others (see MNRC 2019). While the case continues in the courts, Mozambique’s relations with the donor community have started to normalise. A central element in this has been the re-establishment of relations with the IMF,Footnote ¹⁸ illustrated in the approval on 19 April 2019 of IMF emergency assistance following Cyclone Idai, which hit Mozambique earlier in the month, causing massive damage in the centre of the country, including the city of Beira.

A third challenge has been the deteriorating security situation and armed insurgency in the north-eastern province of Cabo Delgado, where Islamic militants have attacked key towns, killing or uprooting well over 100,000 people. The roots of the conflict are still debated, but seem to include a series of local grievances related to social exclusion, combined with interventions from international groups involved in criminal activities such as ivory and heroin trafficking. The conflict is dangerous in itself but also has the potential to spill over to other parts of the country. Importantly, Cabo Delgado is close to the major gas fields.

The fourth challenge, the discovery of huge gas resources after the turn of the millennium, is also an opportunity to turn the country around, provided appropriate institutions and policies are put in place. The aforementioned hidden debt deals undertaken by the Guebuza regime were likely associated with the decision to start developing Mozambique’s massive oil and gas reserves at a time when institutions that provide for various checks and balances were still weak. The creditworthiness of Mozambique stemming from the hype of the gas resources was enough to nourish fraudulent deals, and long before gas exploitation was to begin, speculation and rent seeking was rife. As history and experiences elsewhere in Africa and beyond document, benefiting from natural resources is a most challenging political exercise (see Roe Reference Roe2018). Meanwhile, on the economic front, Mozambique has started engaging with some of the world’s largest companies to find the best way of developing the oil and gas sector to the benefit of the country’s mostly poor people.

Finally, Mozambique has, like the rest of the world, struggled to address the impact of the COVID-19 pandemic. The first COVID-19 case was reported on 22 March 2020 and a state of emergency was declared on 31 March. The COVID-19 crisis and its associated economic effects came on top of the hidden debt scandal and the impacts of Cyclones Idai and Kenneth, highlighting that Mozambique remains highly vulnerable to climatic and policy-induced shocks.

A Structural Shifts

On the return of peace in the early 1990s, Mozambique was predominantly an agricultural economy. As shown in Figure 2.5, in 1996/97 more than 80 per cent of the workforce identified agriculture as their primary occupation, virtually all of which was smallholder or peasant agriculture, not larger-scale commercial activities.

Figure 2.5

Sectoral trends in employment (1997–2015)

Source: Authors’ estimates based on household survey data series 1996/97, 2002/03, 2008/09, and 2014/15 (see MEF/DEEF 2016); private services include finance; public services include health, education, and public administration.

At the same time, whilst important in terms of total production, agriculture has never represented more than half of aggregate real value-added. Figure 2.6 shows that even in the early 1990s, agriculture contributed only about 40 per cent to GDP, while service activities (public and private) contributed approximately another 40 per cent. As we discuss below, this clearly indicates that agriculture has been and remains a very low productivity activity on average.

Figure 2.6

Sectoral contributions to levels of real value added (1991–2019)

Note: Figure refers to the percentage contribution to production value-added in constant 2014 prices; public services include health, education, and public administration.

Source: Authors’ estimates based on unpublished data from National Institute for Statistics.

Over time, there has been a limited shift in the structure of the economy away from agriculture. According to the most recent household survey (2014/15), which constitutes the most reliable source of data on the labour force, around two-thirds of workers were primarily involved in agriculture and the sector contributed around one-quarter of total value-added. Labour movements out of agriculture have been largely towards the private services sector, including commerce and transport, which now represents 22 per cent of all employment. However, the value-added of private services has remained flat over time, indicating that new workers in this sector tend to be less productive than existing workers. Figure 2.7 clarifies this insight, showing labour productivity differentials across sectors relative to the economy-wide average. Labour productivity in agriculture has been about half (-.8 log points) that of the average worker, while the productivity of workers in private services declined over the two decades from 1991 to 2019 from nearly 5 times to just 1.5 times that of the average worker.

Figure 2.7

Labour productivity differences by sector (1997–2015)

Note: X-axis is the natural logarithm of the ratio of labour productivity of the indicated sector to aggregate labour productivity; thus, values below 0 show lower than average productivity; private services include finance.

Source: Authors’ estimates based on household survey data series 1996/97, 2002/03, 2008/09, and 2014/15 (see MEF/DEEF 2016).

As discussed in detail by Jones and Tarp (Reference Jones and Tarp2015), who provide a full decomposition of within- and between-sector productivity changes over the same period, the shift of workers has been largely out of very low-productivity agriculture to informal services activities. Thus, the contribution of the services sector to growth since 2003 has been dominated by a sectoral reallocation effect, as even informal services are more productive than agriculture, but not a within-sector productivity effect. In contrast, agriculture has shown fairly robust moderate within-sector productivity increases (over 1 percentage point per year), despite losing workers in relative terms.

The same figures also point to a ‘missing middle’. Looking over the full time period, secondary sectors (manufacturing, construction) have remained small, both in terms of their contribution to GDP and in terms of employment. For example, in both 1997 and 2015, just 3 per cent of workers were in the manufacturing sector, and the value-added of the sector was equal to 8 per cent of GDP at the start and 9 per cent at the end of the period. In contrast, mining (extractive industries) has achieved very rapid growth of output, expanding to 8 per cent of real GDP, but with almost no change in its employment share. We return to this point below.

B Changing Growth Drivers

The changing structure of the Mozambican economy, in terms of both output and employment, hints at how a series of different drivers of growth have been operative over the post-war period. Three main growth phases are apparent. First, as further supported by Figure 2.8, from the mid-1990s onwards, Mozambique successfully took advantage of the peace dividend, achieving post-conflict stabilisation and recovery (see Tarp et al. Reference Tarp2002). In this period, strong rates of growth across multiple sectors, including agriculture, reflected a combination of a return of displaced people to their homes, the rebuilding of private and public infrastructure, supported by foreign aid and private investment (domestic and foreign).

Figure 2.8

Sectoral contributions to real value-added growth, smoothed (1991–2019)

Note: Manufacturing includes construction and utilities; growth refers to production value-added in constant 2014 prices; non-linear five period filter used.

Source: Authors’ estimates based on unpublished data from National Institute for Statistics.

A second phase, starting around the turn of the millennium, is associated with strong growth in the manufacturing sector, dominated by large-scale capital-intensive investments, particularly in the Mozal aluminium smelter.Footnote ¹⁹ This period, which lasted until the late 2000s, also saw robust service sector growth, alongside a sustained and substantial contribution of agriculture (at 2 percentage points), or more than a quarter of aggregate growth per annum.

The late 2000s, however, saw a shift to a third phase, characterised by an emphasis on the natural resources sector (mining), driven by large increases in foreign direct investment (FDI) into coal and then natural gas field developments. This coincided with an expansion of the finance (banking sector), which increased in size from 2 per cent of GDP in the mid-2000s to over 6 per cent in the latest period (see Figure 2.6). The same period also saw a trend decline in the contribution of agriculture to growth, but strong private services growth.

To get a sense of the magnitude of the recent shift in the sectoral emphasis of growth towards extractives, which has also arguably become a focus of public policy, Table 2.1 provides a summary of changes in consumption and investment components (reported as shares of GDP), as well as sources of investment funds.

Overall, we note that Mozambique has always been a consumption-heavy economy. Total consumption has consistently equalled around 90 per cent of GDP and, as discussed below, the public sector has accounted for an increasing share of total consumption. This is not to say that investment has been low; on average it has been sustained at about 30 per cent of GDP, with public investment comprising roughly one-third of total investment.

Critically, investment has been financed largely from abroad, indicated by the very large volume of foreign savings (which is the mirror of the current account deficit). During the first period shown in the table (1999–2004), which roughly reflects the beginning of the second growth phase, private foreign investment and foreign aid to the public sector (grants and loans) amounted to nearly 20 per cent of GDP, both in equal measure. In the second half of the 2000s, foreign investments in the manufacturing sector tailed off but aid remained strong. In the last decade, however, FDI jumped to over 20 per cent of GDP as Mozambique opened up to investment in natural resources extraction, and these flows quickly came to overshadow the contribution of foreign aid, which has declined substantially in relative terms (see Figure 2.9).

Figure 2.9

ODA as percentage of GNI, 1990–2018

Source: Net ODA received (% of GNI) from World Bank (2020) data.

Three conclusions can be drawn. First, much of Mozambique’s growth has been fuelled by significant inflows of foreign exchange, both public and private, which have generated spillovers either directly into consumption or indirectly into income through investment. Second, however, the pattern of these inflows has shifted increasingly towards capital-intensive natural resource investments, which provides a proximate explanation for the widening labour productivity deficits across sectors (Figure 2.7) and which by definition also suggests that the growth process has lacked ‘inclusivity’. Third, Mozambique has not discovered a consistent (sustained) domestic engine of growth. Rather, not only have growth drivers shifted depending on the dominant source of foreign savings, but also the economy seems to have become less diversified over time. This is evident from Figures 2.10 and 2.11, which show the composition of exports and Mozambique’s export complexity, respectively. Figure 2.10 reveals that manufacturing exports (aluminium) plateaued by the later 2000s; but, starting roughly in 2010, natural resources exports (mainly coal) have quintupled in value and now account for around 50 per cent of all exports. Correspondingly, the relative shift towards lower value-added exports (which are lower in complexity) is evident in Figure 2.11.

Figure 2.10

Major exports in US$ millions (2000–2019)

Notes: Primary materials include energy exports; agricultural goods include fisheries.

Source: Authors’ estimates based on unpublished data from Central Bank of Mozambique.

Figure 2.11

Export complexity score (1991–2017)

Notes: Lower scores mean less complex exports.

Source: Smoothed estimates from The Growth Lab at Harvard University (2020) data.

These three conclusions are reinforced by trends in the final period, as shown in Table 2.1, which merit special attention. As discussed in Section II, in 2016 a series of hidden (illegal) debts taken out since 2013 from overseas commercial banks by publicly guaranteed enterprises came to light. The funds were premised on discoveries of large natural gas fields in the country, but (ex post) appear to have been squandered, various members of the ruling elite and overseas backers being implicated in corruption. Critically, this prompted a major freeze in foreign aid and, correspondingly, a sharp depreciation of the exchange rate. As plotted in Figure 2.8, growth rates simultaneously declined across multiple sectors and public sector investment approximately halved as a share of GDP (see Table 2.1) – that is the sudden lack of foreign inflows outside the natural resources sector, combined with significant macroeconomic uncertainty, had drastic growth consequences, revealing the fragile nature of the earlier growth and the economy’s dependence on foreign savings.

Another way of making sense of these trends is to note that Mozambique has been and remains a highly segmented economy. A large share of the population remains engaged in informal rural economic activities, predominantly smallholder agriculture. In comparative terms, productivity in these activities is low and is strongly associated with high rates of poverty (see below). The substantial FDI over the post-war period has focused on enclave-type industries, with few linkages via employment or provision of inputs to domestic productive sectors. Therefore, as Arndt et al. (Reference Arndt, Garcia, Tarp and Thurlow2012a) and others have formally quantified, inter-sectoral linkages in the economy have been weak and are highly compromised by poor infrastructure and large transport distances between areas of highest agricultural potential and population mass (rural centre and north) and areas of greatest effective demand (urban south). Furthermore, economy-wide benefits from natural resource development have proven elusive, especially as many investments have not reached the production (profitability) phase. In sum, the pattern of employment creation suggests that the infrastructure and business environment remain weak and skewed against labour-intensive manufacturing.

C Competent Macroeconomic Management

Despite the most recent period of crisis, the tail end of which has coincided with the COVID-19 pandemic, macroeconomic management has been competent. Broadly speaking, inflation has been well controlled and fiscal deficits have been almost fully covered by substantial foreign inflows (foreign aid) rather than domestic debt. Tax revenues have also steadily increased, from a low level, via a combination of sensible reforms and relatively rapid growth of specific formal segments of the economy (e.g., finance, natural resources). Table 2.2 supports this narrative, summarising a range of macroeconomic and public expenditure figures for selected years since 2002.Footnote ²⁰

Until around 2015, the combination of increased tax revenue and sustained (although relatively smaller) foreign aid allowed both government consumption and investment to expand. However, most recently we observe that consumption spending now accounts for almost 25 per cent of GDP, while public investment spending has fallen back below 10 per cent of GDP. This is explained by large cuts in foreign aid in reaction to the hidden debts and the ensuing rapid build-up of public debt, external and internal, entailing much higher recurrent servicing costs.

Thus, as compared with the mid- to late-2000s, when Mozambique benefitted from highly favourable debt write-offs, the government is now in a considerably more fragile fiscal position, with debt at distressed levels. Furthermore, the build-up of public debt has not been matched by any boost in investment spending that could be expected to yield future dividends.

D Steady but Slowing Social Progress

Table 2.2 confirms that the real pace of growth on a per capita basis is hardly phenomenal. Since 2000, the average real per capita growth rate equals just 3.4 per cent per annum, implying that it will require more than twenty years to double real incomes. Thus, Mozambique remains a very poor country by any measure. In 2017, Mozambique ranked 180 of 186 countries in terms of real GDP per capita (IMF 2018); and 180 of 189 on the UN’s human development index (UNDP 2018: 22–25).

The post-war period has shown progress on a range of social indicators, including consumption and multidimensional poverty. Data from a series of household surveys, undertaken approximately every five years since 1996, show particularly strong gains in poverty reduction in the immediate post-conflict period, but less impressive gains since then (see Table 2.3).

This is also consistent with the narrative, outlined above, of a weak connection between specific sources of aggregate demand (sectoral) growth and employment. Over the entire period, we estimate that the consumption poverty headcount fell by 2.2 per cent per year, well below the aggregate rate of growth. In turn, inequality has increased, again suggesting that growth has not been broadly shared,Footnote ²¹ and this tendency has worsened since 2015 (Egger et al. Reference Egger, Salvucci and Tarp2020).

Table 2.4 summarises progress in a range of other socio-economic dimensions, including household ownership of assets or capital (economic and human) (see MEF/DEEF 2016).

These are all dummy variables that take a value of one if the household head is literate, has access to electricity, has access to clean water, has clean sanitation, has a robust roof, owns some means of transport, has access to information technology (e.g., telephone), and owns some durable goods (e.g., bed). Throughout the period, all indicators have shown progress. Even so, absolute deprivations are widespread – only about half of adults are literate, half of all households have access to clean water, and less than a third have adequate sanitation. So, despite twenty-five years of steady growth in the post-war period, plus sustained access to large volumes of foreign savings, a lot remains to be done to ensure that all Mozambicans enjoy a decent standard of living.

E Public Sector (in)Efficiency

The foregoing raises the important question: how efficient or cost-effective is the public sector in delivering core public services? As already noted, the relative size of the public sector in the economy has grown substantially. Table 2.1, for instance, shows that total government current expenditures have increased by almost 10 percentage points in relation to GDP, implying far more rapid expansion than in the private sector as a whole. However, according to Figures 2.5 and 2.6, the employment share of the public sector has increased only moderately, while the real value-added of public services (which includes privately provided health and education) has been almost flat over time. In this sense, there is no clear indication (in aggregate statistics) of any significant real economic impacts of the increased spending.

Table 2.5 compares budget allocations to outcomes in education and health for a range of sub-Saharan African countries. It shows that on a per capita basis, social sector spending in Mozambique is comparable to elsewhere (in the middle). Yet outcomes in Mozambique are considerably poorer – for example while more than 90 per cent of children attend primary school, the primary school completion rate is only around 40 per cent versus 80 per cent in neighbouring Tanzania, and under 5 mortality is 74.2 per 1,000 live births versus 53.0 in Tanzania.

Of course, Mozambique’s troubled history explains part of this gap, but other sub-Saharan African countries, such as Ethiopia, also entered the 1990s in dire circumstances and would seem to have made stronger progress and at a lower fiscal cost. Additionally, evidence in Mozambique points to extreme and persistent spatial disparities in access to public services (see Egger et al. Reference Egger, Salvucci and Tarp2020). The more urban south of the country tends to enjoy not just better quality services but also much higher effective public spending than elsewhere. Thus, overall, the public sector would seem to be not cost-effective and marred by inequities in allocations that fail to benefit the poorest.

F Demographic Dynamics

According to INE (2019), summarising the results from the 2017 Population Census, 39 per cent of the rapidly growing Mozambican population lives in Nampula and Zambézia as compared to 21.5 per cent for the provinces in the south. The remaining almost 40 per cent live in the provinces of Tete, Cabo Delgado, Sofala, Manica, and Niassa. The distribution between urban and rural areas shows that two thirds live in rural areas. The overall annual rate of growth of the population between 2007 and 2017 was 2.8 per cent, increasing from 1.7 to 2.5 per cent in the previous decades. Maputo province saw the largest relative increase in its population (60.7 per cent) between 2007 and 2017 while the population of the city of Maputo stagnated. Large increases of more than 40 per cent were experienced in Niassa, Tete, and Nampula, whereas increases of around 30 per cent were experienced in Manica, Sofala, Zambézia, and Cabo Delgado.

Reflecting the steady but slowing social progress discussed in Section D, life expectancy increased from 50.9 years in 2007 to 53.7 years in 2017. However, the population dynamics imply high dependency ratios that will continue at burdensome levels for well more than a generation (Jones and Tarp Reference Arndt, Hussain, Jones, Nhate, Tarp and Thurlow2012, Reference Jones and Tarp2013, Reference Jones and Tarp2016) as nearly half of the population is under fifteen years of age (INE 2019). A critical implication is that the working age population will grow rapidly over the next thirty years. This dynamic is essentially ‘locked in’ as it reflects past fertility decisions. Some 34 per cent of the total labour force is concentrated in the north, 41.9 per cent in the centre and 24.1 per cent in the south (MITSS, 2020), reflecting the regional distribution of the general population.

The majority (60.8 per cent) of the young labour force (15–34 years) is between fifteen and twenty-four years old and, according to MITSS (2020) based on the IV General Population Census 2017, it is estimated that between 2020 and 2024, the labour force will increase by 2.26 million, including 1.62 million young people (15–34 years). How can the labour market absorb this magnitude of new entrants? While it is impossible to make firm predictions, there is an internal logic to what is feasible, even in the best of policy environments. This derives from the existing structure of employment – sectors with large existing employment shares must be the principal sources of ‘new’ jobs. Put differently, even if sectors with small employment shares were to grow at an annual rate of 10 per cent or even 15 per cent, this would be insufficient to absorb all new entrants (Jones and Tarp Reference Jones and Tarp2012, Reference Jones and Tarp2013, Reference Jones and Tarp2016).

Informal non-farm enterprises, the second largest category of jobs, are both substantially smaller than agriculture and much bigger than formal employment. The latter constitutes a minor share – less than 15 per cent of all workers report receiving a wage, of which the large majority is in informal employment. This share configuration dictates that most new entrants into the labour market must seek work in agriculture or informal enterprises. This has very much been the situation for the past twenty-five years and will remain the case in the near future. Indeed, under a high-growth scenario of 8 per cent growth in formal sector jobs, the informal sector will continue to increase in absolute size until at least 2030 (Jones and Tarp Reference Jones and Tarp2012, Reference Jones and Tarp2013).

These facts inescapably imply that future dynamics in smallholder agriculture and the informal sector will be of fundamental importance to achieving inclusive growth. This is the core policy challenge facing the Mozambican government and its people over the next decades.

G Taking Stock

The evolving pattern and complexity of Mozambique’s growth trajectory, as well as the sheer scope of the challenges the country continues to face, limit the value of attempting to reduce this experience to a few well-defined underlying causes. We would argue that many of the conventional factors identified as constraints to growth may well be symptomatic of a deeper malaise, namely the lack of a clear (vision for a) domestic engine of growth and an excess reliance on external savings to finance demand.

While no formal comprehensive growth diagnostic in the spirit of Hausmann et al. (Reference Hausmann, Rodrik and Velasco2005) has been undertaken for Mozambique to date, a range of less formal ‘diagnostics’ point to weaknesses across multiple domains. These include low private returns to economic activity as well as the high costs of finance (the two distinct primary branches of the growth diagnostics framework). These exercises frequently end up documenting a long list of symptoms and do not identify specific ‘deep’ causes or reform priorities.

Lledó (Reference Lledó, Clément and Peiris2007), for instance, notes that in both 2002 and 2006 firms identified the high cost of finance as a primary concern. However, on top of this, he notes that median returns to manufacturing firms are near zero, which reflects the ‘combined impact of low social returns and limited private appropriability’ (p. 344). In a more recent exercise, the World Bank (2016) echoes a similarly wide range of key challenges: ‘Inadequate physical and logistical infrastructure, excessive bureaucracy, weak public institutions, credit constraints and a complicated land-tenure system continue to discourage investment and narrow the range of economic opportunities available to domestic firms’ (p. 35).

The point is not that these diagnostics are necessarily wrong. Rather, it is that it is difficult to isolate unique growth constraints/opportunities or untangle causes from symptoms given the range of challenges and the segmented nature of the economy.

In the same spirit, it can be highlighted that previous diagnostic exercises for Mozambique have placed wildly different interpretations on the direction of public reform efforts. Ten years ago, improvements in the business environment were seen as impressive and indicative of a strong and coordinated government commitment:

Nonetheless, a 2017 diagnostic of the business environment suggests that these reforms have been cosmetic, that there is ‘a lack of political will to implement reforms because the status quo benefits politicians and the politically-connected [… and] business registration reform […] has resulted in little improvement of the process for entrepreneurs’ (Franco and Katiyo Reference Franco and Katiyo2017: 19–20).

Put differently, views change as to where priorities lie and where genuine progress has been made. And, as yet, there does not seem to be a strong politically independent domestic constituency for deeper reforms.

In our view, what this amounts to is not a specific set of distinct technical growth constraints per se but a more general failure to prioritise the upgrading of domestic competencies in either the public or the private sector beyond that of servicing international demands. A vision of a self-sustaining process of growth and development has been absent, and in its place, a fragmented and shifting external orientation has dominated, most recently degenerating into growth-damaging rent-seeking. Many of the growth challenges represent symptoms of this failed vision and corresponding growth engine.

Looking ahead, a key risk is that this lacuna will only expand as natural resource extraction (natural gas) plays a stronger role, cementing rentier elements in the public and private sectors and undermining competitiveness elsewhere in the economy. In the short-to-medium term, significant public finance gains from these industries are likely to be lacking, while exposure to commodity price volatility is likely to become more acute.

Avoiding an Angola-style scenario of deepening inequality and a bloated public sector that fails to deliver quality public services must be the priority. And this is especially important in Mozambique given political and spatial tensions that have already boiled over into military conflict, as discussed in Section II. Sadly, with public investment weakening and high debt obligations, the capacity of the government to support inclusive structural transformation has weakened since the late 2000s. Thus, decisive action must be taken.